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Truth in Lending: 7.1.1 Organization of This Chapter
The prior chapter details open-end credit disclosure requirements. This chapter examines TILA provisions that substantively regulate the terms of credit cards and, in some cases, other non-home-secured open-end credit. Many of these provisions were added by the Credit Card Accountability, Responsibility and Disclosures (CARD) Act of 2009,1 and became effective on February 22, 2010.2
Truth in Lending: 7.1.2.1 Enactment of Credit CARD Act
From about 1980 to 2010, there was little regulation of credit card practices, due to the sweeping expansion of federal bank preemption.3 Most credit card issuers are federally chartered depository institutions, and thus were not required to abide by state limits on interest rates, fees, and other lending practices.4 As a result, abuses by credit card issuers spun out of control, creating enormous hardships for consumers.5
Truth in Lending: 7.1.2.2 Scope of Protections
The vast majority of the Credit CARD Act provisions specifically apply to “credit cards under an open-end (not home-secured) consumer credit plan.” Thus, the Credit CARD Act protections do not apply to all open-end credit. Furthermore, Regulation Z defines “credit cards under an open-end (not home-secured) consumer credit plan” to exclude two specific types of credit cards:17
Truth in Lending: 7.2.1 Introduction
One of the biggest problems with credit card pricing had been that issuers were not required to abide by a fundamental contract principle—that a “deal is a deal.” Prior to the Credit CARD Act, credit card issuers were permitted to raise the interest rate for any reason, or no reason at all, by simply mailing a notice to consumers. These rate increases were a major impetus behind the Credit CARD Act.22
Truth in Lending: 7.2.2.1 Penalty Rates
A penalty rate is an increase in a credit card account’s APR, triggered by the occurrence of a specific event, such as the consumer’s making a late payment or exceeding the credit limit. Raising an APR from the mid-teens to 30% or higher on future transactions simply on the basis of a single transgression alone would be enough to draw criticism. After all, the credit card lender has already collected a one-time charge for that late payment or over-the-limit transaction, which probably more than covers its costs.
Truth in Lending: 7.2.2.2 Universal Default
Universal default is an especially criticized form of credit card repricing. With universal default, credit card issuers impose penalty rates on consumers, not for late payments or any behavior with respect to the consumer’s account with that particular lender, but for late payments to any of the consumer’s other creditors. In some cases, issuers will impose penalties simply if the credit score drops below a certain number, whether the drop was due to a late payment on that other account, or due to some entirely different factor.
Truth in Lending: 7.2.5.3 Rate Increases That Must Be Re-Evaluated
The re-evaluation requirements applies both to: (1) APR increases based on an individual consumer’s credit risk or other circumstances specific to that consumer and (2) APR increases based on non-individualized factors, such as changes in market conditions or the issuer’s cost of funds.239 However, re-evaluation is required for only those rate increases that require a change-in-terms or penalty-rate notice.240
Truth in Lending: 7.2.5.4 Intersection with Right to Reinstatement of Pre-Increase Rate After Six Months of On-Time Payments
In some cases, a rate increase may be applied to an outstanding or protected balance because the required minimum payment on the account is over sixty days late.250 In those cases, the consumer has the right to have the pre-increase rate reinstated if she makes six months of on time payments.251 When this six-month reinstatement right applies, the issuer does not need to conduct a rate re-evaluation.252 However, if the consumer fails to make
Truth in Lending: 7.2.5.5 Factors for Re-Evaluation
The Credit CARD Act requires issuers to use the same factors in a rate re-evaluation that the issuer initially based the rate increase upon.254 Regulation Z, however, permits issuers to use either:
Truth in Lending: 7.2.5.6 Rate Reductions Resulting from Re-Evaluation
The rate re-evaluation requirement does not require the issuer to reduce the APR for an account by any specific amount, even if the re-evaluation indicates that the rate should be reduced.261 Thus, the issuer need not decrease the rate to the rate that was in effect prior to the increase that triggered the re-evaluation.262
Truth in Lending: 7.2.5.7 Acquired Accounts
Special rules for re-evaluations apply for acquired accounts. If a card issuer acquires a credit card account from another issuer, the acquiring issuer must conduct rate re-evaluations using either the factors considered by the issuer from which it acquired the accounts or use the factors that it currently considers.268
Truth in Lending: 7.3.1 Overview; Substantive Right to Reject Changes
The Credit CARD Act requires issuers to provide, in any notice of a change in account terms or increase in APR, and pursuant to requirements established in Regulation Z, a brief statement of the consumer’s right to cancel the account before the changes take effect.273 While the Act does not specify which types of changes require this notice, Regulation Z limits this requirement to only certain account terms,274 and does not require it for increases in the APR.
Truth in Lending: 7.3.2.1 Substantive Right Exists Only When Change-in-Terms Notice Required to Be Given
The right to reject changes to an account generally applies whenever the issuer is required to send a change-in-terms notice that discloses the right to reject.280 In general, a change-in-terms notice is required when there is a “significant change in account terms,”281 meaning a change to a term required to be disclosed in the account-opening table, an increase in the required minimum periodic payment, or the addition of a security interest.282
Truth in Lending: 7.3.2.2 Exceptions
The most critical exception to the right to reject changes is that it does not apply to any increases in the APR for an account. Even though the Credit CARD Act specifically requires a notice of the right to cancel for APR increases,287 the FRB excluded these increases from the right to reject288 because it believed that the right was redundant to the protections against APR increases for a protected balance.289
Truth in Lending: 7.3.3 Reasonable Requirements for Consumer’s Submission of Rejections
An issuer may establish reasonable requirements for a consumer’s submission of rejections to a change-in-terms.298 For example, the issuer may require that:
Truth in Lending: 7.3.4.1 Summary
If an issuer receives a properly submitted rejection of a change-in-terms, the issuer must not:303
Truth in Lending: 7.2.3.1.2 Pricing terms covered by the protections
The Credit CARD Act prohibits increases in the annual percentage rate for an outstanding or “protected”38 balance.39 “Annual percentage rate” is defined as the product of multiplying each “periodic rate” used to compute the finance charge by the number of periods in a year.40 The “periodic rate” is defined as “a rate of finance charge that is, or may be, imposed by a creditor on a balance for a day, week, month, or other subdivision of a year
Truth in Lending: 7.2.3.1.3 Protections apply to closed or acquired accounts
The protections against increases in the APR, fee, or charge continue to apply to an account after it is closed or acquired by another creditor.60 This provision includes prohibiting any periodic fee based solely on the outstanding or “protected” balance that was not imposed before the account was closed, e.g., a closed account fee.61 A closed account fee is also prohibited by the penalty fee restrictions in Regulation Z.62
Truth in Lending: 7.2.3.2.1 General
The Credit CARD Act permits an issuer to increase an APR applicable to an outstanding or “protected”66 balance at the expiration of a specified period of time, if:
Truth in Lending: 7.2.3.2.2 Six-month minimum
The Credit CARD Act requires that all promotional rates have a minimum period of six months.81 Regulation Z incorporates this six-month minimum into the exception itself, i.e., in order to qualify for the promotional rate exception, the promotional period must last six months or longer.82 However, the issuer is permitted to limit the promotional rate to a particular category of transactions, e.g., balances transfers over $100.83
Truth in Lending: 7.2.3.2.3 Contingent increases prohibited
The promotional rate exception does not permit an issuer to disclose and apply a rate increase that is conditioned on a contingent circumstance or is at the issuer’s discretion.84 Permitting a contingent or discretionary rate increase would create a loophole to the general prohibition against rate increases for outstanding or “protected” balances and during the account’s first year.85
Truth in Lending: 7.2.3.2.4 Deferred interest programs
Issuers that offer credit cards through retailers often offer deferred interest programs. These plans permit the consumer to defer the interest on the balance, which will be waived or refunded, or the consumer will not be obligated for the interest, if the balance is paid off by the end of the deferred interest period.88 If the balance is not repaid by then, the consumer will obligated for all of the interest that accrued between the date of purchase and the end of the deferred interest period.
Truth in Lending: 7.2.3.2.5 Waiver or rebate of interest, fee, or charge
After the passage of the Credit CARD Act, at least one credit card issuer attempted to evade the prohibition against retroactive rate increases by using a rebate offer.